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Institutional Investors with assets under management of USD 31 trillion want more detailed disclosure from portfolio companies about their boards of directors, business strategy and ESG, according to Morrow Sodali’s annual Institutional Investor Survey, released today. The survey highlights three areas of concern for investors looking ahead to the 2018 annual meeting season:

Clear articulation of a company’s business strategy and goals;

Directors’ skills, qualifications, experience and individual contribution to the effectiveness of the board;

Detailed business rationale for board decisions and their alignment with strategy and financial performance.

The Morrow Sodali survey, the third of its kind, was conducted between November and December 2017. Forty-nine global Institutional Investors, with USD 31 trillion of assets under management, responded to the survey.

Institutional Investors will be increasingly likely to support a credible activist story.

ESG issues are either fully integrated or progressing towards full integration with investment decision-making.

Investors will seek enhanced disclosure around materiality and sustainable metrics linked to long-term business strategy.

Kiran Vasantham, Director of Investor Engagement, said “Now in its third year, this survey provides issuers with valuable insights on investor expectations. It is a bellwether for all companies as we enter the 2018 Annual Shareholder Meeting season. I am delighted so many investors took part in the survey, as it provides an important overview of asset managers’ priorities on a broad spectrum of ESG issues.”

Morrow Sodali has further strengthened its position as Australia’s leading Shareholder Engagement and Corporate Governance Advisory firm following the appointment of prominent Sydney-based governance specialist, Jana Jevcakova.

Ms Jevcakova is one of Asia-Pacific’s leading experts in corporate governance and proxy research, having spent the last seven years advising domestic and global institutional investors whilst engaging with company boards around ESG matters.

“Corporate Governance has become a core focus for both directors and management alike, and Jana’s recent work leading the research efforts at CGI Glass Lewis further enhances our unparalleled depth of knowledge and specialist expertise in this area,” Mrs Leftakis said.

“I’m very excited to be joining Morrow Sodali at a time when investors are taking a more hands-on approach towards Environmental, Social and Governance (ESG) related issues and the market is buzzing with the word culture. I look forward to supporting Morrow Sodali’s clients and further building on our reputation as trusted advisors,” Ms Jevcakova said.

Shareholder engagement is one of the most significant recent developments in the area of corporate governance. It covers the intense and regular dialogue taking place between issuers and their investors on topics related to the way a company is managed (composition and role of the board, balance of power, executive compensation, etc.), more particularly in the context of the preparation of the shareholders’ annual general meeting.

Fostered by the European regulation (directive on shareholders' rights), this dialogue is part of the business logic of large institutional investors whose index strategy or the importance of investment stakes do not allow them to sell their shares easily. Favoring "voice over exit," their goal is to encourage issuers to put in place effective governance mechanisms to protect the long-term interests of shareholders.

The intensity and content of this dialogue are still heterogeneous, but a positive dynamic is underway. Investors are beefing up (or create) specialized governance teams capable of developing independent views (which could diverge from recommendations provided by proxy advisors) on how companies are governed. The best in class companies contribute to the training and the experience of the investment professionals by the quality of the dialogue which go beyond a reformulation of the characteristics (often stereotyped) described in the official documents.

No-one can deny that the seasons are changing, but the impact climate change has on business also needs to be acknowledged and factored into the C-suite's decision-making. The Taskforce on Climate-related Financial Disclosures has galvanised debate on how businesses should measure and disclose their risks.

The TCFD is now widely accepted as a leading framework CEOs can use to report the potential positive and negative financial impacts their activities may cause to the environment.

While the taskforce is a step in the right direction, according to ratings agency MSCI ESG Research, only 60 per cent of companies report Scope 2 greenhouse gas emissions, which are indirect emossions from the generation of the electricity purchased and consumed by an organisation. So there's still a long way to go.

Michael Chandler, Governance Director of corporate governance consultancy Morrow Sodali, says the CEO needs to be involved in the stakeholder engagement process the company conducts when assessing the materiality of environmental risks and opportunities.

"Where most CEOs go wrong is by looking at how other companies report these risks, which is not a very good strategy. In the first instance, they need to do a thorough assessment of the company's individual risks, which requires considerable input from shareholders and key stakeholders such as customers, suppliers and environmental groups," Chandler commented.

Shareholders and proxy advisors are becoming more vocal, engaging with ASX-listed companies on the suitability of non-executive directors. A growing proportion are critiquing the performance and accountability of directors, particularly where there are alleged breaches of conduct or the company is underperforming.

The responsibilities of non-executive directors are both varied and increasing, so it’s difficult for investors to establish a standardised approach to evaluating board performance. Non-executive directors classified as ‘independent’ may not be socially independent from their colleagues, which may impact their ability to perform their duties without prejudice1. Shareholders continue to lack clear insight into the inner workings of boardroom dynamics, hence their characterisation as ‘black boxes’. More than ever, the investment community and broader corporate governance stakeholders are demanding a deeper understanding of the factors that influence board interactions and decision making. Consequently, strong disclosure around board performance, skills, experience and succession planning initiatives is critical.

The ACCR is a not-for-profit organisation that conducts research on issues of corporate behaviour and assists its members engage with companies on issues that concern them. The ACCR has previously led several public campaigns against large Australian listed companies, generally seeking increased disclosure around human rights and environmental-related issues.

Can you explain what the ACCR does and where the group fits amongst broader corporate governance stakeholders in the Australian market?

ACCR pursues and promotes improvements to large, Australian-listed companies’ environmental, social and governance (ESG) practices. Our power to influence corporate behaviour is premised on two central ideas:
- that a company’s negative impacts on the environment and society can also undermine that company’s interests, and the interests of its shareholders; and
- that although listed corporations are primarily representative democracies, they are also to some extent, participatory democracies.

Given the influence of corporations on our lives and our planet, shareholders have a unique role and responsibility in ensuring the sustainability of our future. The ACCR was established to strengthen responsible investment practices in Australia to this end.

The ACCR does research on ESG issues and engages with listed companies in relation to specific ESG risks. We use shareholder resolutions to escalate engagement with companies, particularly where private investor-corporate engagement has failed to deliver an outcome. Shareholder resolutions are commonplace overseas but are an under-utilised mechanism in Australia. Resolutions are not deployed in every engagement we do, but on some issues, they have proven to be the most effective tool available.

While voting against director re-election or the remuneration report is not uncommon in Australia, these actions are not well tailored to highlighting environmental, social or policy content related governance issues. In many situations, shareholder resolutions are a better way to address ESG underperformance.

Listed companies are feeling the heat from big super funds and global investors to embrace action on issues such as climate change and diversity.

It’s become a critical issue for listed companies and an ASX roundtable discussion - which saw the participation of Michael Chandler, Governance Director Morrow Sodali Australia - explores the best way to respond to this pressure.

Together with other four distinguished representatives from Regnan, MSCI ESG Research, CGI Glass Lewis and AMP Capital, Michael Chandler talked about topics such as environmental and social reporting, ESG discussions within listed companies, activists' engagement etc...

"Responding to activists and their requests is taking up corporates’ time. The primary request we’re seeing revolves around the impact of climate change. The broader expectation, consistent with recommendations from the Task Force on Climate-related Financial Disclosures (TCFD), is providing more foresight into, and forward modelling and scenario analysis around, the resilience of asset portfolios over the long term. Companies we work with are struggling to gather the data and then figure out how transparent they wish to be in disclosing and quantifying their environmental impact over the long term," commented Michael Chandler when asked about what are the hot button issues for corporates in relation to environmental and social reporting.

Download the attachement below to read the entire roundtable discussion.

Morrow Sodali is a global consultancy providing comprehensive governance and shareholder services to corporate clients around the world. Our knowledge of the issues covered by the implementing regulation is rooted in the nature and scope of the services we provide in the course of our work with more than 700 listed companies operating in 40 different markets.

Morrow Sodali's comments reflect the insights we gain from working not only with EU companies but with companies based outside the EU. In addition, we engage regularly on behalf of our clients with stakeholders whose interests are affected both directly and indirectly by the Commission’s regulations. These stakeholders include: institutional investors, both local and global; shareholder organizations and membership groups; proxy advisors; activists; NGOs and special interest advocates; and other constituents whose engagements with companies utilize regulated channels of communication and share voting.

Finally, our comments reflect our firm’s uniquely global structure and the range of advisory and transactional services we provide to companies and boards of directors in their dealings with these diverse entities.

After attending Morrow Sodali's seminar on Corporate Governance at the recent IOD Open House event, Sue Lawrence of TMF Group wrote an article on the mechanism of robust corporate governance and on the panel's focus on "What is good Corporate Governance?"

Amongst the wide-ranging discussion, panellists reflected on the ongoing importance of the UK Governance Code. As part of its most recent review in April 2016 the original definition in 1992 by the Cadbury Committee was reiterated that:

“Corporate governance is the system by which companies are directed and controlled. Boards of directors are responsible for the governance of their companies … The responsibilities of the board include setting the company’s strategic aims, providing the leadership to put them into effect, supervising the management of the business and reporting to shareholders on their stewardship…”

Whilst specifically applicable to companies listed in the UK, its use underpins robust corporate governance across all companies. Even fast growing new startups need to have a semblance of corporate structure, leadership, oversight and evidence as they continue on their successful path. This becomes particularly important if external funding is sought to further grow the business and to meet regulatory oversight requirements.

Investa Listed Funds Management Limited, the responsible entity of Investa Office Fund (ASX: IOF), announced a proposal to acquire a 50% shareholding on a joint venture basis in Investa Office Management Pty Limited. The vote to approve the proposal was held on 31 May 2017.

Macmahon Holdings Limited (ASX: MAH) announced that it has signed binding documentation to implement a potentially transformational transaction with PT Amman Mineral Nusa Tenggara. It is currently anticipated that completion will occur in July 2017.